California mortgage manager Brandon Moss remembers the "scary time" when the industry fell to its knees during the 2008 financial crisis.
Even so, Moss said he always knew the residential real estate and mortgage sector would bounce back from the colossal bust, so he stayed in the business and has no regrets. These days the home values in many Southern California markets have increased above the precrisis peak, and lending activity remains vibrant.
"Once you get through these cycles, you know what it's like the next time around if something happens," Moss said.
The 39-year-old Moss joined Fairway Independent Mortgage last year as greater LA area manager and a loan officer based in Calabasas. Fairway funded more than $21 billion in U.S. mortgages in 2017.
Moss started in the mortgage business out of college in 2003, following in the footsteps of his father. He quickly rose through the ranks and would go on to hold senior positions at several independent mortgage companies and two banks.
In 2003, the real estate business was red hot in Southern California and jobs in the industry were considered well-paying. From the mid-1990s until the downturn hit in 2007, home values in key California markets had more than tripled.
"My dad said it's a great business so you should get involved," recalled Moss. "I went into the mortgage business and started as an assistant and quickly became an originator and built my business up very quickly at that time."
Moss began working for a privately owned mortgage banker in his first industry job. That company would later get acquired as part of a wave of industrywide consolidation as the refinancing business tapered off.
Subprime mortgage rage
It also was a period characterized by loosening of subprime residential lending standards as well as exotic mortgage products such as loans that let borrowers pay interest only or skip monthly payments. Subprime mortgages were a popular way for people with weak credit histories to buy homes with little to no money down.
"You didn't need to have income documentation and didn't even need to have down payment," said Moss. "It was pretty wild back then."
Big banks such as Citigroup, Wells Fargo and Bank of America dominated lending in 2003. There was also a giant pure play mortgage company, Countrywide Financial, then based near Los Angeles and one of the largest local employers in the mortgage industry.
Yet UCLA economists were warning as far back as late 2003 that a new bubble might be forming and estimated homes in Southern California were overvalued by 10 to 15 percent. It was a sobering thought, especially since it was made by a group of economists credited as being the first major U.S. forecasting group to call the recession of 2001.
"Right now the warning flags are starting to fly," wrote the UCLA Anderson Forecast in December 2003.
Super-heated market cools
By 2007, Countrywide and other major residential lenders were in trouble with massive losses due to problems in the risky subprime mortgage market. Subprime loans bundled into securities became toxic assets for financial institutions as delinquencies and foreclosures grew in California and other super-heated markets.
"During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction," Countrywide's then-CEO, Angelo Mozilo, told employees in a letter in September 2007. Countrywide also announced then it would need to slash its payroll by up to 12,000 employees, or about 20 percent of its workforce.
In the mortgage sector alone, about 125,000 jobs were lost in 2007 and 2008, according to Mortgage Daily, a trade publication. The mortgage industry, which employed roughly 535,000 in 2005, saw headcount plummet to around 246,000 by late 2010 but as of June 30, 2018, was just over 707,000.
At the same time, major lenders began tightening home loan requirements in spring of 2007 as well as scaling back subprime loans. There also were more financial institutions exiting the business after they were unable to raise capital.
Mortgage meltdown spreads
"Right up to the crash, there were very few lenders still open and wanting to do loans because they lost their shirts in the securitization market," recalled Moss. "It was a scary time for everyone in the business."
However, it wasn't long until the mortgage meltdown began spreading to the broader economy and would lead to the worst financial crisis since the Great Depression.
Mortgage giants Fannie Mae and Freddie Mac were placed in government conservatorship in the fall of 2008, and AIG — a seller of insurance on debt securities backed by the subprime mortgage — was rescued by a government bailout. Lehman Brothers, an investment bank that had a role in the subprime debacle, didn't get a rescue and went bankrupt Sept. 15, 2008.
"It was really with AIG that large numbers of people began to wrap their head around what was happening," said Aaron Terrazas, Zillow senior economist and a former economist in the Treasury Department's Office of Economic Policy.
The financial crisis that morphed into the Great Recession would result in new regulations that would reshape how banks do business and alter the landscape of key players in the mortgage industry. The mortgage servicing side of the industry became "less concentrated" by 2012 as the share of loans serviced by nonbank players rose, a government report concluded in 2016.
Regulatory reforms
Regulatory change came with the 2010 Dodd-Frank Act, including tighter standards for residential mortgage loans. The 2010 legislation also gave the Consumer Financial Protection Bureau broad regulatory responsibilities for home loans providers, although the Trump administration wants to scale back some of the watchdog agency's powers.
Meantime, Countrywide ended up getting sold to Bank of America for approximately $4 billion in July 2008 but the deal would prove to cost tens of billions more when factoring in the bad loans, accounting write-downs, settlements and litigation costs. Between BofA and Countrywide, more than $600 billion in mortgage-backed securities were issued in the run-up to the 2008 financial crisis, according to The New York Times.
Moss, who is married and has a young daughter, never worked for Countrywide and was lucky to never get laid off. He takes pride in the fact that he helped families stay in their homes during the tough times by getting them lower interest rates on loans and cutting monthly payments.
California market recovery
Moss said the rapid increase in home prices in recent years and "bidding wars" for properties in Southern California is somewhat reminiscent of what happened leading up to the housing bubble a decade ago.
"In many local markets here, prices have increased to levels above that of the peak of 2006," he said, adding that it reflects low interest rates and limited inventory for homes in the region.
According to Zillow, the precrisis peak in the Los Angeles County market was in 2006 but it had peaked earlier in some other Southwest markets, including Las Vegas. The median home value nationally has recovered from its precrisis peak and some areas of New York have been slower to bounce back.
"I was confident it would always rebound," said Moss, adding that it's made mortgage professionals and the industry stronger. "That's one of the reasons I stuck in the business."
Moss said some of the lower down payment programs for mortgages that are starting to become available in the industry remind him of the activity before the crash.
"The difference between now and then is that everyone that gets a loan now has to qualify based on their income," he said. "So I don't see the same potential for a crash as we did in 2007 or 2008. Borrowers also have better credit scores and they have to have more skin in the game than what the used to in the past. It won't be as easy to walk away from a home when they're putting 20 percent down as opposed to 2008 when they could 100 percent financing."
